Permanent Life Insurance

If you’ve got a family, you need insurance. But what kind? There are two basic types of insurance: term life and permanent. While term life insurance offers higher death benefits with lower premiums, it has its limitations. Permanent life insurance, however, lasts your whole lifetime. For people who’ve already maxed out their individual retirement accounts (IRAs), it’s another way to let your money grow — tax deferred. Permanent life insurance is like having a death benefit and an investment account all in one.

What Is Permanent Life Insurance?

Permanent life insurance is just that: life insurance that lasts your whole life. It’s more expensive than term life but adds cash value and has great tax benefits. The best way to explain permanent life insurance is to break it down into its two basic types:

1. Whole life
2. Universal life

Whole Life Insurance

Whole life insurance is the most basic type of permanent life insurance. It’s like having a savings account and a death benefit all rolled up into one. While more affordable policies like term life only cover you for 10, 20 or 30 years, whole life lasts your whole life, until you stop making payments or cash it in.

Whole life insurance policies are a great place to put your money if you want to have protection and see your money grow at the same time. Whole life policies carry with them a cash value that accrues over time from the payment of your premiums. On top of that, all gains are tax-deferred until time of realization. 

For the passive investor, whole life policies are the safest type of permanent life insurance. Interest is a fixed rate and typically just enough to keep up with inflation. The advantage to having a whole life policy is that your rates remain the same throughout. Interest earned is tax deferred for the duration of the policy. 

Pros:

• Premiums fixed for the lifetime of the policy
• Adds cash value and allows for withdrawals or loans
• Death benefit guaranteed

Cons:

• More expensive than term life
• Approval not guaranteed

Universal Life Insurance

Like whole life, universal life insurance is a great way to ensure lifetime protection while at the same time adding cash value. Allowing for the same tax benefits, the big difference between universal and whole life is that you get to choose exactly how much you want to invest and how much protection you want. 

A universal life insurance policy gives you the flexibility to raise or lower your death benefit as you see fit. When you pay your premiums, the insurance company first takes out the cost of your policy. The rest is then deposited into a cash account. This is where the universal policy allows you more flexibility. You can invest your money in a money market account or stocks and bonds. These investments allow your money to potentially grow faster than with a whole life policy.

Types of universal life insurance include:

1. Guaranteed universal life: A guaranteed universal life insurance policy offers low-cost options with a fixed death benefit. These are the most affordable policies because they carry with them little risk and less cash value. Although flexible, premiums remain fixed.
2. Variable universal life: A variable universal life insurance policy gives you the option of investing the money from your cash value into accounts similar to mutual funds. While there is greater potential for gains, there is also increased risk.
3. Indexed universal life: Indexed universal life insurance allows you to invest your cash value into major indices like the Dow Jones or the S&P 500. If the markets go up, you see gains. Because it’s a life insurance policy, however, gains get capped with losses minimized.

Pros:

• Greater potential for gains
• More flexibility
• Increased control over investments

Cons:

• Increased risk
• Greater responsibility

How Does Permanent Life Insurance Work?

Permanent life insurance is a great investment vehicle for the long-term and the passive investor. If you buy a permanent life insurance policy when you’re young, chances are your premiums are going to be low — and this lasts your whole lifetime. One day in the distant future, all that money you invested in the policy will pay off for your beneficiaries.

What most people don’t know, however, is that money paid into a permanent life insurance policy accrues in value over time. It’s like having a savings account with a death benefit built in. That’s to say that if you ever decide to cancel the policy, there is value. It’s like owning a home versus renting. Permanent life insurance policies build equity while offering protection at the same time.

Because your policy has equity, you can borrow against it. You can even cash it in. The best part is that your money grows tax deferred, just like an IRA. For people who’ve already contributed the maximum amount to their retirement accounts, a permanent life insurance policy is another way to see their money grow and dodge the tax man at the same time — at least until the policy expires. As long as you pay your premiums, a permanent life insurance policy is just that: permanent.

What Is the Waiting Period for Permanent Life Insurance?

The waiting period for permanent life insurance is the time between your application and when your coverage actually kicks in: typically five to six weeks. Waiting periods are standard not only for permanent life insurance but for many term policies as well. 

The waiting period is necessary so underwriters can accurately evaluate your health profile and determine exactly how much your policy will cost. While the waiting period is typically reserved for policies with greater death benefits, not all life insurance requires a waiting period. Certain types of low-end term life and guaranteed issue policies that don’t require a medical exam don’t need a waiting period. You can pad the waiting period by:

• Purchasing temporary insurance
• Choosing a low-cost, no-medical-exam term life policy
• Buying final expense insurance

Most people waiting for a high-end permanent life insurance policy to kick in go ahead and purchase temporary insurance. Temporary insurance fills in the gap between the time you apply and when your permanent insurance policy goes into effect.

Benefits of Permanent Life Insurance

First and foremost, the benefit of a permanent life insurance policy is that it remains in force for your whole lifetime. If you buy a policy when you’re young and get a good rate, that rate is going to stay with you for your entire life. The policy can never get canceled as long as you pay your premiums.

Permanent life insurance also serves as a great investment tool for the passive investor. If you’re looking for a secure place to stash your money, where the rate of investment typically keeps up with inflation and interest gains are tax deferred, then a permanent life insurance policy is the perfect investment tool for you. And don’t forget the death benefit. If the unexpected suddenly happens to you, your loved ones are covered.

Who Needs Permanent Life Insurance?

Permanent life insurance policies are expensive. So who needs them? If you’re young and in good health, a permanent life insurance policy doesn’t have to be expensive. Think of it this way: You’ve got your whole life ahead of you to stash money away and you decide to deposit it into a safe savings account. Now imagine that exact same savings account with a death benefit. That’s a permanent life insurance policy.

Reasons to purchase a permanent life insurance policy include:

1. Locking in permanent rates: While low in cost at first, premiums on a term life policy will rise in the future. Premiums for your permanent life insurance policy get locked in from the very beginning.
2. Accumulating cash value: Looking for somewhere safe to stash your money? Why deposit it in a savings account when a permanent life insurance policy offers the same security plus the added death benefit?
3. The ability to borrow against it: Try that with a savings account. With a permanent life insurance policy, you can access the money while leaving the policy (and your protection) in place.

Who needs permanent life insurance? Anyone with a family who doesn’t want to see the money they pay in premiums one day be gone.

Compare Permanent Life Insurance

Decided that permanent life insurance is the way to go? Still would like to see some pricing? Let Benzinga show you how permanent life insurance is not only the best route for you, but affordable too.

If you’d like to find out more about permanent life insurance — or any other type of life insurance — check out all the great articles Benzinga has to offer. Let Benzinga be your go-to source for all things life insurance.

Frequently Asked Questions